Paycheck Protection Program Loans for Taxpayers with Self-Employment Income

Update May 28, 2020

House passed the Paycheck Protection Program Flexibility Act today. The Senate is expected to vote next week but likely the Senate bill will have different provisions than the House approved today.

The legislation extended the Covered Period to 24 weeks and reduced payroll spending requirements from 75% of loan funds to 60% of loan funds, giving businesses more flexibility in deciding how to allocate the emergency funds.

Interim Final Rule (IFR) allows partnerships and seasonal employers to increase their existing loans if loan amounts were determined under prior guidance and existing guidance will allow a higher loan amount. Existing guidance allows partnerships to include 2019 SE income of partners as a “payroll cost”. Guidance released April 28th established an alternate method to determine PPP loan amounts for seasonal employers. Requests from borrowers under this IFR are subject to strict time limits so should be made immediately.

The SBA announced a safe harbor applicable to borrowers receiving loans less than $2 million. The borrower will be deemed to have made the required certification of “need for the loan” in good faith.

For borrowers receiving loans in excess of $2 million, the SBA will “review” their loans. If, based on the review, it is determined that the borrower lacked an adequate basis for the required certification, the SBA will seek repayment of the loan and notify the lender that no forgiveness shall be granted. If the borrower then repays the loan, the SBA will not pursue any enforcement actions.

Legislation introduced in the Senate on Tuesday, 5/5 would overrule an IRS notice and clarify that ordinary expenses funded by PPP loans are deductible by taxpayers. The bill, the Small Business Expenses Protection Act of 2020, S. 3612, is currently in the Senate Finance Committee. Treasury Secretary Mnuchin is supporting the IRS’ position.

For purposes of the PPP’s 500-or-fewer-employee size standard, an applicant must count all its employees and the employees of its U.S. and foreign affiliates, absent a waiver of or an exception to the SBA’s affiliation rules.

The SBA has concluded that PPP Loans issued to nonprofits do not represent federal financial assistance. Therefore, these loans will not be subject to Single Audit requirements. However, loans issued under the EIDL program will be considered as federal financial assistance and are required on the SEFA.

Updated May 5, 2020

Treasury Department released updated FAQ (#43): SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. The SBA is extending the repayment date for this safe harbor to May 18, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor.

IRS announced that expenses paid with PPP loan proceeds that are forgiven cannot be deducted: Notice 2020-32

Employee Retention Credit – additional guidance concerning eligibility and interaction with the PPP Loan. Taxpayers not receiving a PPP Loan may be able to qualify for this refundable credit to offset their payroll costs.

All employers can defer the employer portion of social security tax (6.20%) deposits due between March 27th and Dec 31st until Dec 2021 and 2022. The IRS clarified on April 13th that if the employer receives a PPP Loan, the tax that can be deferred stops only at the time the loan is forgiven by the lender. Employers should contact their payroll service if they wish to take advantage of this cash saving opportunity.

Employers cannot claim the Employee Retention Credit if they receive a PPP loan. The IRS has not clarified when this credit can be claimed by taxpayers obtaining a PPP loan.

The twelve-month period to determine “Payroll Costs” can be either calendar year 2019 or the twelve months prior to obtaining the loan

Payments made to independent contractors do not qualify as “Payroll Costs”

“Payroll Costs” to calculate the maximum loan amount and the amount of loan forgiveness should be calculated based on gross payroll, not net (after employee deductions) payroll.

The per-employee compensation cap of $100,000 does not include benefits

Employer’s share of Social Security and Medicare tax are not included in “Payroll Costs”

Borrowers who have submitted applications that have not yet been processed can revise their applications based on clarifications included in the FAQ.

On April 14th the Small Business Administration released guidance for borrowers with self-employment income. This includes sole proprietors (with and without employees), independent contractors, gig workers, and partners or limited liability company members with self-employment income reported on their Schedule K-1’s.

Loan Amount

The loan amount is based on the taxpayer’s “payroll costs” as discussed in our previous blog, COVID-19 Paycheck Protection Program and Forgivable Loans Summary. For self-employed taxpayers, their “payroll costs” would be equal to the net income reported on their 2019 Form Schedule C (Line 31) subject to a maximum of $100,000.

A Schedule C showing 2019 income and expenses must be included with the borrower’s application regardless if the borrower has actually filed their 2019 tax returns or not.

If taxpayers have employees, their total “payroll cost” would include the “payroll cost” for these employees.

Payroll cost of the self-employed taxpayer does not include the cost of their health insurance or retirement plan contributions. These amounts are included in “payroll cost” for employees.

Partners or LLC members may not apply for a PPP loan based upon their self-employment income. Instead, the self-employment income reported on their 2019 Schedule K-1 (maximum of $100,000) can be included as a “payroll cost” on the application filed for their partnership or LLC. It is presently unclear how to correct previously approved loan applications filed by partnerships and LLCs that did not include this self-employment income as a “payroll cost”.

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